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Sanskruti Madhukar Kale* and Harshal Chhabra+
Introduction:
In a recent landmark judgement decided on 6 December 2023, the Hon’ble Supreme Court of India (“the SC”), in the case of Cox and Kings Ltd. v. SAP India Pvt. Ltd (“Cox and Kings”), addressed the intricate question of whether non-signatories can be bound by arbitration agreements by delving into the applicability of the Group of Companies Doctrine (“the Doctrine”)within the Indian legal landscape. The ruling acknowledged the complex commercial reality of multi-party transactions, and, in such a setting, the challenge faced by the foundational rule of arbitration which requires the consent of the involved parties.
The Doctrine, rooted in the idea of implied consent, suggests that an individual or an entity not formally signing a document, but associated with a “group of companies,” may either be bound by or eligible for advantages under an arbitration agreement created by its related entities, whether they be sister companies or parent corporations. The key to the implementation of the doctrine hinges on the demonstration of a shared intention among all involved parties, whether they are actual signatories or not.
Against this backdrop, this blog aims to provide a concise overview of the evolution of the Doctrine from a national as well as an international standpoint, analysis of the recent Cox and Kings’ judgement and its impact and implications on the Indian arbitration scene.
The story so far:
The Doctrine was introduced, for the first time, in Dow Chemical, a French case. It allowed the arbitration agreement to cover parties who were not formal signatories to the agreement, as long as there exists a shared intent to be committed to the agreement. It was held that the criteria for ascertaining the “shared intention” involve observing the objective conduct exhibited in the course of negotiating, executing, and concluding the primary contract that encompasses the arbitration agreement.
In 1996, the Swiss Federal Tribunal, in the case of 14 ASA Bull[1], refrained from explicitly endorsing the Doctrine. However, the tribunal did acknowledge implicit consent to arbitration by a third party under specific circumstances, hinging on the non-signatory’s active role in performing the contract.
The High Court of Australia, in the case of Tanning Laboratories gave a different interpretation to the term “claiming through and under,” as given in the International Arbitration Act. The Court emphasized that an individual asserting a claim has the option to either pursue the enforcement of a purported contractual right or resist the enforcement of such right. Essentially, in order for someone to invoke a cause of action or defence “through or under a party,” then that party must have had a vital element of the cause of action or defence, either vested in them or exercisable by them.
Back home, in India, the SC, inspired by the interpretation in Tanning Research Laboratories highlighted the difference between Section 45,[2] and Section 8[3] of the Arbitration act in Sukanya Holdings. It was held that the scope of Section 45 is expansive, thereby allowing the referral of “any person” to arbitration if they claim “through or under” the signatory party.
However, only in the Chloro Controls judgement did the Supreme Court clarify that in exceptional cases, a non-signatory to an arbitration agreement can be compelled to arbitrate based on three essential factors: direct relationship, common subject matter, and interdependence of agreements. Then in the case of Cheran Properties , the SC emphasized on how the Doctrine unravels the true essence of business arrangements from a layered structure. Therefore, it was concluded that a party need not be a formal signatory to the arbitration agreement to be held to its obligations. However, this is valid when a group of companies is identifies, and the conduct or statements of the party objectively indicate an intention to be bound by the relevant contracts.
Additionally, in Mahanagar Telephone Nigam’s case, the court highlighted the application of the Doctrine in situations characterized by a “closely-knit” organizational framework, and robust financial ties, thus forming a “single economic unit” or a “unified economic reality.” The Doctrine comes into play when a discernible connection exists between parties who have signed the arbitration agreement and those who have not. This becomes especially relevant when funds from one company are utilized to provide financial support or facilitate the restructuring of other members within the group.
Finally, the recent decision in Oil and Natural Gas identified several significant factors including mutual intent, relationships, subject matter, composite nature and performance of contract as to bind a non-signatory party within a group.
These judgments move beyond rigid consent requirements, focusing on constructive consent through parties’ actions, incorporating equitable estoppel and piercing the veil.
Decoding the recent Cox and Kings judgement:
The judgement, prompted by a reference from Cox and Kings Ltd , addresses crucial concerns in arbitration such as (i) the permissibility of joining a non-signatory to an arbitration agreement under the Arbitration and Conciliation Act, 1996; (ii) the interpretation of an intention to arbitrate based on parties’ conduct as per Section 7 of the Act; and (iii) the validity and applicability of the Doctrine in Indian arbitration law, specifying its conditions.
The Chief Justice while expounding on the broadened definition of “Parties”, clarified that according to “Section 2(1)(h)” read with “Section 7” of the Arbitration Act, both the parties, signatories and non-signatories, are included in an arbitration agreement. Contrary to the misconception that only those who sign the agreement are bound, the Court, emphasizing on “Article 7(3) of the UNCITRAL Model Law,” held that, in an arbitration agreement, if the content is recorded, then it can take any form, be it oral, tacit, or through conduct.
Moreover, the SC established the significance of the conduct of the non-signatory parties as a potential cue of their assent to be obligated by the arbitration agreement. It was underlined that such agreements can be either express or implied, hinging on the actions or conduct of the parties involved. The Court grounded this perspective in the principle that the non-signatory parties’ conduct could unmistakably demonstrate their intention to enter into a legal relationship, rendering signatures or explicit exchanges less pivotal.
In the previous Cox and Kings case, Chief Justice Ramana highlighted a perplexing situation where the Doctrine, allowing a party “claiming through or under” to be referred to arbitration, didn’t grant relief under Section 9 of the Arbitration Act which allows parties to seek interim measures. One of the most crucial aspects of the recent judgement is that, it establishes “mutual intention” to include a non-signatory as a “veritable party,” enabling them to seek interim measures under Section 9, thus resolving the highlighted anomaly. The court rejected Chloro Controls’ interpretation linking the Doctrine to “claiming through or under,” deeming it flawed and at odds with well-established principles of contract law and corporate law.
Finally, the SC asserted the need for a balanced approach between the “consensual essence of arbitration” and the “modern commercial reality” involving non-signatories. The court stated that equilibrium can be achieved by holistically applying the a few designated factors. The active involvement of non-signatories in the contract’s performance, the composite nature of transactions, and commonality of subject matter indicate their intertwined connection to the tribunal’s jurisdiction. Hence, the factors laid down in Oil and Natural Gas were upheld.
Striking a Balance: Party Autonomy and Nuanced Consent in Cox and Kings
One of the major impact of the Cox and Kings judgement is its reaffirmation of the foundational principle of arbitration as rooted in “Party autonomy.” Here, the Court has reiterated that the cornerstone of Arbitration, is the parties’ willingness to the process. This, therefore, contributes to maintaining the autonomy of involved parties in shaping the terms and mechanism of dispute resolution according to their specific needs and preferences.
The judgement highlights that in the current commercial reality where group structure and collaborations are intricate, parties might be interconnected in ways not evident in formal agreements. Therefore, it acknowledges a nuanced understanding of consent, which can be implicit, derived from conduct, relationships, and the interdependence of transactions.
One of the most important features of this judgement is its structured yet a balanced approach. It outlines designated factors which should be considered to determine whether a non-signatory can be bound by an arbitration agreement. However, at the same time, by providing ample of scope for a nuanced evaluation, based on the specifics of each case, it successfully avoids a rigid and one-size-fits-all approach.
Specifically in cases of composite transaction, the Courts’ acknowledgement of the Doctrine becomes consequential as it seeks to ensure accountability of all parties who have been materially involved in the negotiation and performance of the concerned transaction.
Moreover, understanding that non-signatories can be drawn into arbitration, this judgement encourages businesses to re-evaluate and adapt their risk management strategies, anticipating potential disputes among closely linked entities.
In several commercial sectors, where multiple parties are involved, disputes give rise to multiple proceedings. Oftentimes, different proceedings before different forums result in conflicting decisions, thus costing time and money. However, by recognition of the Doctrine, the court has bound all those entities to arbitration agreements who might not be formal signatories but, by virtue of their conduct, have consented to the agreement.
Additionally, this judgement streamlines the entire dispute resolution process in India. Earlier too, there were parameters which the courts used to rely upon to determine whether a non-signatory can be considered as a party to an arbitration agreement. However, there was patent non-uniformity in those considerations, which gave rise to inconsistent decisions. Therefore, by virtue of this judgement, now businesses can navigate complex transactions with clearer guidelines on arbitration involving non-signatory parties.
[1] Swiss Federal Supreme Court, 29 January 1996, 14 ASA Bull. 496 (1996).
[2] Power of judicial authority to refer parties to arbitration.
[3] Power to refer parties to arbitration where there is an arbitration agreement.
